The Canal expansion is the engine driving Panama’s economy to an unprecedented growth. This reached a record of 11.5% in 2007, bettering the previous record of 10.8% in 1961 and made Panama the world’s second fastest growing economy after China. Affected by global economic problems, the economy slowed down and concerns were raised about "stagflation", but nevertheless economists forecast growth somewhere between 8% and 9% for 2008, according to former Minister Guillermo Chapman now member of the board of the Panama Canal Authority and founding partner of the economic think tank, Indesa.
President Martin Torrijos whose term in office was from 2004 to 2009, worked to transform the growth into a solid foundation based on highly educated human resources that will provide, over the next decade, major improvements in wealth distribution and social and economic sustainability. He achieved success in restoring public finances, reduced fiscal deficit and won the passage of an arduous fiscal reform while revamping the debt-ridden social security system. Another major achievement was the reduction of unemployment by almost half from 12.4% in 2004 to 6.2% early 2008, as a result of the measures put in place and strong performance from most sectors of the economy. In 2007, Panama trained some 150,000 workers in preparation for the Canal expansion.
The Canal expansion is the engine driving Panama’s economy to an unprecedented growth.
The healthy economy, combined with the prospect of economic growth related to the Panama Canal expansion, attracted foreign investment which totaled $1.8 billion in 2007, around 10.5% of GDP. Economists expect the figure to increase in 2008 as international companies are taking advantage of Panama’s strategic location to position themselves and create regional distribution centers. The $700 million development project of the former Howard US Airforce Base which was awarded in 2007 to London & Regional (L&R) is transforming the area, now called Panama Pacifico, into a massive new trading hub for the Americas. International and domestic companies in many fields have signed in to establish their headquarters and facilities there. The 1,100 hectare Panama Pacifico project offers space and tax incentives, a special customs regime and more flexible immigration and labor rules.
Caterpillar Inc has signed a contract with the government to build its first Latin America headquarters on a 100-hectare location at a cost of $ 25 million and where it will create jobs for some 350 Panamanians. The heavy equipment manufacturer established a call center and training shop for heavy equipment operators to work on the Canal expansion and carry out other infrastructure projects in the country. Another example of the confidence of international companies in investing in Panama is that at Tocumen international airport, DHL has inaugurated a new facility with an investment of $4.5 million.
Construction has been the major source of growth and employment in recent years mostly because of strong demand for retirement apartments and second homes from American ‘baby boomers’ and European retirees attracted by Panama’s cheaper cost of living. Domestic factors are also playing a growing role in economic expansion. The wealth effect of a booming domestic economy in 2007 was seen in the expansion of mobile phone services, which increased by 17.6%, and in purchases of prestige items such as new cars. Construction, which despite the rapid increase in activity in recent years still accounts for a relatively modest 4.7% of GDP, registered the fastest pace of expansion of any sector for the second consecutive year, expanding by 19.8% as a result of the ongoing private residential construction boom and an increasing level of public-sector infrastructure projects. As a result, Panama achieved a surplus equivalent to 3.5% of GDP as fiscal reforms helped improving public finances.
The key driver of growth in 2008 continued to be transport, storage and the communications sector accounting for 21% of GDP. The strong demand for cellular, internet and international calls services continued.
Civil engineering works and public infrastructure projects boosted the construction sector in 2008 as the government invested in building and improving major roadways to support the canal expansion. The re-construction of the 58 km Panama-Colon highway will be completed in March 2009. In addition, the new 42km toll-highway Panama-Cativa (at the entrance of Colon) which is being built by Brazil’s Odebrecht, was scheduled to be opened to vehicular traffic in the first quarter of 2009. A new road going parallel to the new locks will access both the Panama-Colon highway and the Panama-Colon toll highway and will link to the Centenial Bridge and to Cocoli-Rodman and further to the Howard development economic zone, now called Panama Pacifico. The project is expected to be ready for 2012. Panama is also building nine overpasses in and around the capital and a two mile-long highway called the Coastal Beltway (Cinta Costera) on the Bay of Panama.
The Torrijos Administration has also been active in promoting free trade agreements with neighboring countries and the region. In June 2007, Panama and the US signed the bilateral Trade-Promotion Agreement (TPA) pending ratification by the US Congress. Meanwhile Panama signed in March 2008 a bilateral free-trade agreement (FTA) with Guatemala which has opened the way for Panama to participate formally with the rest of Central America in moves to create a Central American customs union and be included in a regional trade agreement with the European Union. Panama has also resurrected talks towards a bilateral FTA with Mexico, previously broken off in 1999 after failure to reach an agreement.
Tourism, which now represents 14% of Panama’s gross domestic product has become an important segment of the economy. Thanks to a worldwide advertising campaign in recent years, the activity has been on the rise growing by 18.6% and 12.1% for hotels and restaurants respectively during 2007. The number of visitors to Panama grew by 28.6% while tourists and cruise excursionists rose by 23.4% to 1.18 million in 2007. Tourist spending also grew by 23.4% to $1.18 million in 2007.
During the first quarter of 2008, tourists visits increased by 10.1% while tourist spending grew by 18.1%. ‘Panama has been discovered by the world,’ commented a Panamanian businessman. One concern of the tourism industry is the shortage of hotels in Panama City but seven new hotels were scheduled for construction to bring some 1,500 additional rooms mostly in the capital city, including 800 condo-hotel units.
Panama’s financial sector, which includes banks, the stock exchange, insurance and re-insurance companies, is one of the most solid pillars of the services sector that accounts for almost 80% of Panama’s GDP. The international banking center, created in 1970, has thrived for more than three decades. According to Panama’s Banking Superintendency report, Panama’s total banking assets in 2007 rose to $56.32 billion, an increase of 24.4% from $45.10 billion at December 2006. Consolidated banking assets grew by 33.3% to $68.74 billion. Growth of profits was substantial at 20.4% while total loans registered an increase of 25.6% and reflected the excellent performance of the domestic and regional economies. Domestic loans also grew by 16% and were accompanied by improvements in loan administration and conservative criteria in segments of risky markets. Liquidity increased by 25%, being the major source of the expansion of credit and loans.
The solidity of Panama’s banking center and the dollarized economy prompted the installation of dozens of new financial institutions in 2007 and 2008. The banking center is composed of a total of 91 banks, of which 46 have a general license, two of them are government-owned, which are able to conduct all types of domestic and international activities while there are 32 international licensed banks restricted to offshore banking and 13 representative offices of foreign banks that are restricted to liaison and marketing activities only.
With Panama enjoying an exceptional economic growth, law firms have boasted high returns in corporate and shipping business alike. Corporate clients are looking at Panama for long-term investments in areas related to the canal expansion and its ancillary services. Although some lawyers say that part of their new activity might be short-term, such as real estate, the construction boom has had a domino effect on many a sector of the economy including energy, aviation, hotels, financing and banking. The maritime sector business has grown significantly in activities related to ports, cargo and bunkering and the demand for legal services in these and other fields such as immigration, has increased substantially.
